Exit plan unresolved as Portugal's last bailout review kicks off

LISBON (Reuters) - Portugal’s international lenders started on Tuesday their last evaluation of its performance under its bailout, with further reforms on the agenda and the question of a standby loan when it exits the programme next month still unresolved.

In a sign of the review’s forward-looking bias, the inspectors from the European Commission, European Central Bank and International Monetary Fund held one of their first meetings with the main opposition Socialists. Opinion polls put the party on track to win next year’s general election.

The IMF has said a political consensus on not raising expenditure after the rescue programme ends is vital.

The fund said on Monday the recent return of economic growth had boosted Portugal’s near-term prospects, but more needed to be done to free up the jobs market to cut labour costs and unemployment.

The Socialists agree the course of fiscal discipline has to continue, but reject further austerity, which the centre-right coalition government will continue to apply this year and next on top of huge tax hikes and spending cuts already implemented under the bailout since 2011.

Economic growth that ended Portugal’s worst recession since the 1970s, stoked by exports and more recently a recovery in consumer demand, has improved the country’s chances of moving on from its bailout without the need for a standby loan.

But that is still unclear, and likely to be a focal point of discussions during the review.

STANDBY LOAN?

The government has promised to define by May 5, when the euro zone’s finance ministers are due to meet, whether it will follow Ireland by making a clean exit from its 78 billion euro (64.05 billion pounds) bailout or request a precautionary loan from the European Union to support its debt market funding.

“The negotiation that matters is with the European component of the troika (of lenders) about the (possible) precautionary loan,” said Filipe Garcia, head of Informacao de Mercados Financeiros consultants.

Deputy Prime Minister Paulo Portas said on Monday the government was still mulling its exit strategy, while pointing out the country’s bond yields were very close to where Ireland’s stood about a month before it exited its rescue programme last December.

Portugal’s benchmark 10-year bond yield hit its lowest level in eight years of 3.68 percent on Thursday and was trading at 3.74 percent on Tuesday. Ireland’s yields were at just over 3.5 percent in late November.

On Wednesday, Portugal will also hold its first regular bond auction in three years, which analysts see as the last remaining element in its transition back to the debt market. If successful, as analysts expect, the sale is likely to reinforce Portugal’s case for a clean exit.

“I think it won’t be necessary to formalise a loan,” Garcia said. “The market just wants to know that Portugal has a ‘rich uncle’. Europe has said it will stand by Portugal if it keeps working towards meeting its goals and reinforcing this informal support may be just enough.”

Portugal has to cut its budget deficit to 4 percent of economic output this year after beating its target with a 4.9 percent gap in 2013, and then to 2.5 percent in 2015.

It has to keep reducing the budget gap to keep the structural deficit below 0.5 percent by 2017 under the EU budget discipline pact, which was endorsed by the Socialists.

Analysts say that regardless of the composition of the next government it will have few options but to stick to the European targets, although the return of economic growth last year suggests further doses of austerity after 2015 could be much lighter if the economy keeps growing as projected.

The bailout programme is due to end formally on May 17, but the analysis of the last evaluation, which should last until the end of April, and tranche payments will go on until the end-June.